In recent months, I’ve been reading more and more about a hot new topic: helium production. Helium is an essential gas in medical as well as industrial applications. The key message being spread is that this so far opaque market is about to become more transparent, as many small exploration companies seem to be embarking on promising projects. Is this really the next sector you should bet on, or is it too much hot air that will deflate, bringing headaches like too much inhaled helium?
Summary and key takeaways from today’s Weekly
– Helium is a precious and unique gas that is facing shrinking supply and higher demand.
– What sounds like a no-brainer, is not so simple to handle from an investment perspective.
– While many exploration companies are being pitched, I remain cautious. For me, Qatar with its already established LNG infrastructure will be the key player.
Maybe, some of my readers have noticed, too, that more and more messages and posts about helium being the “next big thing for 2023” occur.
This is mainly due to supply shortages of this essential and precious gas. As you know, I like situations with short supply, because structural supply deficits are hard to overcome in the short- to medium term, because mining operations are slow.
I prefer imbalances on the supply side, not the demand side.
Those who tried to buy a helium balloon last year – like I did – may have noticed that the cost of blowing up has blown up rather dramatically. If you were lucky enough to even get your hands on a helium filled balloon, at all.
One Tweet that came along my timeline and triggered me to write this Weekly was:
What sounds like a great story to discover before everyone else does (and to be already positioned with investments before it makes big rounds), is seldom a sign to hurry up.
Quite the opposite, it is more a sign to be cautious, especially in this particular case of helium, as you will see.
Before any money is moved, any serious investor has the duty to get familiar with the industry and the companies in question. At the very minimum, the main moving parts have to be understood.
Of course, it makes sense to dig a little bit deeper and learn about this industry. I will show you why helium is a special and unique resource as well as where its day to day applications are (besides the funny ones).
Then, we’ll have a look at several helium explorers that claim to be working on promising projects that are seemingly supposed to change the whole industry. But you will see that even if they are right, their stocks are likely going to be very risky bets with questionable outcomes.
It is worth it to watch this space, but I’d be very cautious and stay defensive.
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What is helium, how is it produced, where used?
For sources and more information, see here, here, here, here, here, here and here.
Helium is a gas with unique characteristics and one of the 18 so-called “noble gases”.
It is the second most abundant element in the universe after hydrogen with a relative share of around 25% of all the elements. Hydrogen, Helium and Oxygen are the three elements with very high concentrations. All other elements are way lower and thus classified as relatively rare.
The earth’s crust, however, has a different composition.
While oxygen is still hugely available, helium is not among the biggest elements. It is rather rare and more difficult to access. Helium is created inside of uranium rocks as a byproduct or non-radioactive decay. The relative amount of helium can vary, depending on the quality of the source. Concentrations above 0.3% are said to be commercializable.
It is derived out of the ground, usually by upstreaming natural gas with which it binds (with its negatively charged oxygen or nitrogen atoms; helium itself is positively charged, like carbon).
Hence, in simplified terms, helium is often a byproduct of the extraction of nat gas.
Besides, helium is the second lightest element (after hydrogen) and the chemical substance with the lowest known freezing as well as boiling point. It only becomes liquid at nearly –270°C. This means, it is the coldest possible liquid.
Where is it used for?
Not only is helium used for party balloons or to pitch your voice up to sound like Mickey Mouse. There are really serious use cases in medical and industrial applications.
Liquified by pressure and ultra low temperatures (I explain the process in a few paragraphs), it is used for cooling medicinal and technical equipment.
The most common applications are for cooling magnets during magnetic resonance imagery (MRI) scans which account for about 20% of all helium used. Likewise, helium is used in semiconductor and hard drive production or for welding metals like aluminum, but also in rocket science.
Future demand is expected to grow somewhere in the single digits yearly.
By far the biggest producer of helium are the United States and Qatar with around 44%, respectively 32% or together more than 75% of total world production.
However, the US share is shrinking while Qatar has grown strongly as a key helium supplier.
Other important producers are Algeria, Russia and Australia, but already way behind. Small amounts are also produced in Poland, China or Canada.
When it comes to resources, we have a slightly different picture.
Note: In geology terms, “resources” are an inferior and more unsure measure than “reserves”.
Hence, always when you find a company where management pats themselves on the shoulder that they have huge “estimated resources”, but no official reserves, better be skeptical and cautious. It is not uncommon for resources to be slashed by 30% or 50%, if the respective commodity price and production costs become unfavorable.
But these are the numbers I could find for helium.
Due to having the say over (its part of) the world’s largest gas field in the Persian Gulf, Qatar has also the biggest estimated helium resources with around 25%.
Qatar’s part of the gigantic gas field is called “North Dome” in the north of Qatar and estimated to hold 8% of total world’s gas reserves. It is shared with Iran (its part being called “South Pars”) which due to sanctions is not able to make use of it.
Why has Qatar risen to the second largest helium producer? The answer to this question can be found in the extraction process of helium out of gas.
You will certainly be familiar with the process of distillation. While heating a substance, one after another the lightest elements with the lowest boiling points evaporate and get extracted from the original mixture. The higher the temperature gets, the more elements start to evaporate, depending on their boiling point.
This is for example – in pretty easy terms – a crucial step in Whisky production where the lighter alcohol leaves the mixture while water stays.
Now, imagine this process in exactly the other way around.
Instead of heating, you now cool down natural gas under high pressure‚ with ever more lower temperatures. More and more gaseous substances start to become liquid and leave the gas mix. What stays the longest is – helium!
It is the last element to become liquid, because it has, as written above, the lowest boiling point of all known elements. And because Qatar is shipping its gas in liquid form (that’s LNG – liquified natural gas), it has to cool it anyway.
Why not making use of it? Instead of wasting the helium (it is not inflammable), Qatar build a second business out of its LNG production.
In this interesting article above, it is also written that Qatar intends to grow its helium business and become an ever more meaningful force in this special, but crucial market over the next decade.
In comparison to Iran, Qatar gets foreign capital investments as well as technology to be able to work on its ambitions and expand its production capacities. Money, technology, transportation as well as demand are no hurdles.
Now, to the price of helium, which is an opaque, intransparent market where often the security or reliability of long-term delivery is more important than the final price.
There is no spot activity, hence you will have difficulties to find a proper price tracker. It is not exactly, but slightly comparable to uranium. Both markets are living by secrecy and privately negotiated prices between the trading partners. And in both industries supply has a higher role than price.
When the price of a commodity is high, new supply usually gets motivated to enter the market.
The spark you noticed last year in preparation for a birthday celebration, likely was due to shut-downs for maintenance works in USA and Qatar – the two biggest markets – as well as an explosion in a Russian facility, the fourth biggest producer. I read that due to this supply shock some customers only received portions of their contracted supplies because of a lack of helium.
This more or less coincides with the new emerging hype of helium explorers from North America. In the next section, we are going to look at the “story” behind this new hype and some exploration companies from this seemingly emerging sector.
The helium market – hot or cold air?
The screenshot below is of an article from October 2022, i.e. around four months old. Don’t get me wrong. I am not making fun of such headlines and articles. I respect every opinion, independent of whether I agree or not.
But it is a sign for me that there is already massive pitching for a non-secretive area anymore. That’s a serious warning sign.
If you read through this article, you will see that certain companies are only mentioned and a few sentences tell where they are active geographically. But it lacks any broader context or serious analysis, especially from the financial side of things.
That’s where I jump in and take over the baton for you – at least regarding the exploring businesses with a broad brush overview.
From the article, but also from own research, I could find the following micro- and small cap companies. Beware, most of them are illiquid penny-stocks which don’t trade on the main stock exchanges and more or less made the same moves up and down like the price chart of helium above showed:
- Helium One Global (ISIN: VGG4392T1075, Ticker: HE1)
market cap of 48 mn. GBP
for the investor presentation, click here - Avanti Helium (ISIN: CA05351P1080, Ticker: AVN)
market cap of 51 mn. CAD
for the investor presentation, click here - Global Helium Corp (ISIN: CA37959W1023, Ticker: HECO)
market cap of 21 mn. CAD
for the investor presentation, click here - Royal Helium (ISIN: CA78029U2056, Ticker: RHC)
market cap of 79 mn. CAD
for the investor presentation, click here - Helium Evolution (ISIN: CA42328K1021, Ticker: HEVI)
market cap of 15 mn. CAD
for the investor presentation, click here - Desert Mountain Corp. (ISIN: CA25043D1078, Ticker: DME)
market cap of 223 mn. CAD
for the investor presentation, click here - privately held Pulsar Helium
for the company’s website, click here
There are certainly more of them, but this is what I stumbled upon.
The market caps of the publicly listed first six companies range from 15 mn. CAD to 223 mn. CAD. However, only one of them – Desert Montain Corp. – has more than 80 mn. CAD. This is a very dangerous territory to step over.
Nonetheless, here is my short commentary to each:
1. Helium One Global – or “The Primary Helium Company” – has an exploration project in Tanzania, Africa, with three active project areas.
I don’t understand the suffix “global”. It claims to have a “clean” and unusually high-concentrate helium resource, containing 10% helium in the gas mix. Maybe you remember from the first part of this article, that a concentration of more than 0.3% is already enough for commercialization. More than 1% is rare.
Helium One is still in the exploration stage and the only company of the list that is traded in London in GBP. In December 2022, they raised fresh equity of the equivalent of 20% of their market cap. The offering was said to have been oversubscribed. The proceeds are going to be used for further drilling.
The CEO commented the equity raise the following (bold from me): “2023 promises to be a momentous year for the Company as we focus on making a discovery that can be transformational for the Company.”
Also, in their latest update, management informed that the company won’t receive their drill rig as defined in a non-binding agreement. Now, they are looking for a replacement supply.
Everyone can judge for themselves if this interesting from a risk / reward perspective.
2. Avanti Helium is actively drilling for helium in Western Canada as well as the bordering North of the US (state of Montana). In Q4 2023, i.e. still nearly a year from now, Avanti plans to start helium production. It also has only resource estimates.
A capital raise was done in October 2022 at a very low price and diluting shareholders by then 10%. Now, overnight from 30 January to 31 January 2023, the company again raised a large sum with massive dilution of aroud 10%, however, at a ca. 30% higher price than in October.
At least, Avanti writes that is has contracted a drill rig for its Montana operations, unlike the first company above.
During the first nine months of 2022, Avanti burned 3.7 mn. CAD. That makes roughly 5 mn. CAD for the whole year. It is a comparable number to 2021.
No production, just drilling and exploring. Cash hungry.
3. Number three is Global Helium Corp. This is one of the two smallest companies from the list.
One of its pitches is that due to the shrinking US helium production and reserves, Canada is the new place to be. The region in which Global Helium Corp. is active, is the same like Avanti Helium. The company acquired drilling rights where mostly nitrogen, instead of carbonated gas, is the main element. This is said to be cheaper.
In the presentation, you can see that massive dilution is underway:
The next slide from the same deck is a phantastic pitch, but there’s little substance to it. They expect a massive supply boom – this alone already is frightening and concerning as more supply inevitably will lead to deteriorating commodity prices:
Their latest news were some more acquisitions of drillable land masses.
The last financial fillings are as of 30 June 2022. The company burnt 3 mn. CAD in the first half and had a cash balance of 4.8 mn. CAD. I couldn’t find an outlook or plan with concrete production plans.
4. Royal Helium last summer acquired another exploration company via an all-stock merger. It is likewise active in Western Canada, but unlike the others, Royal Helium already expects first production during the current Q1 2023. It claims to be a first mover, while its competitors are said to be more behind. This statement fits with what I saw and read until here.
It is further the first to say that they want to be a leading helium producer. Part of its strategy is also to acquire other companies. In August, Royal Helium uploaded an interesting press release:
“Royal Helium Ltd. (TSXV: RHC) is pleased to announce that it has entered long-term agreement with a major North American space launch company for the supply of helium. Initial deliveries under the supply agreement will commence in 2023.”
Royal Helium Press Release, see here
From what I read and wrote until here, this seems to be first small glimmer of hope. The customer will likely be either SpaceX or the NASA. Let’s see what happens.
In early January 2023, Royal Helium raised fresh capital and diluted shareholders by some 6–7%. That is still a high number, although way less than its competitors from above.
Unfortunately, the fully diluted share count, i.e. including stock grants, options and warrants, is 30% higher than the basic, current share count:
I subscribed to their newsletter to watch it further.
If production should indeed commence in Q1, then we’ll soon see first financial results.
5. Next one, Helium Evolution. This company is the smallest from from a capitalization perspective with just 15 mn. CAD. But – somewhat surprisingly – it says (and I saw it also in a competitor’s presentation) Helium Evolution has the largest land rights for drilling of any publicly traded company! It is only active in Saskatchewan, Canada.
Interesting: The company has 10 mn. CAD on its balance sheet. That is a huge amount compared to the current market capitalization.
But wait a moment!
Helium Evolution has received an equity investment from a privately held US company which secured 80% (!) of working interest. This means, that Helium Evolution gets outside capital, does the work and only receives 20% of the outcome.
Interesting structure.
Maybe that is a plausible explanation for why it has such huge drilling rights, but only the lowest market capitalization.
Furthermore, the fully diluted share count is nearly 3x higher than the basic. Management holds 22% of diluted stock, this means they have high incentives to succeed. But this will damage the stock price down the road.
The current plans foresee further drilling for 2023. Final commercialization is not concretely envisioned.
6. The last publicly traded stock and the biggest company by market capitalization, is Desert Mountain Energy. It Intends to start production in Q1 2023 and is active in Arizona, US. On 30 January 2023, it was announced that Desert Mountain Energy added some more land masses for drilling.
Compared to the North American competition, DME seems to have found sources with relatively high helium concentration. They estimate 4% of the gas masses to be helium, while in most cases helium concentration is around or even less than 1%.
Potential shareholder dilution is comparatively low with “only” a 15% spread between basic and fully diluted shares outstanding. This is nonetheless not a low number!
12 mn. CAD are facing a cash burn of 3.5 mn. CAD in the last fiscal year which ended on 30 September 2022. DME should have enough cash to start production. Let’s see!
I likewise subscribed to the newsletter to have an eye on them from time to time.
7. We can make it short, as there are no finances available and the company is privately held. They say that they have two projects that are “primary” sources of helium. This means they are looking for purer forms, but without more precision. The two projects are located in the USA and on Greenland.
The company further states that it is the only one with a license for explorations in Greenland. A few days ago, on 25 January 2023, Pulsar raised 2.9 mn. CAD via a private offering of warrants – the sum raised was nearly 3x the previously estimated amount. This confirms the high interest in this sector.
Maybe, Pulsar could a candidate for an IPO, soon.
As you see, the helium space is quite an adventurous place to look for investments.
All discussed companies are pre-production, whereas some seem to be closer to commercialization than others. Nonetheless, the risk at this stage is way too high. What I want to see at the very minimum is first production results and the corresponding economics.
Promises and goals are fine, but what counts in the end are hard numbers!
The main problem I have with the industry as a whole is that it seems to be a foregone conclusion that the new emerging producers – if they make it to that stage – are ready to save a situation with shrinking supply from the biggest market, the USA.
But there is no guarantee for success. The companies first have to prove that they are actually producing sufficient amounts of helium to reach profitability. Especially, as the cost of financing is rising.
A possible outcome is that most of these companies enter production and start selling their helium. But with a sudden and big supply increase, prices will come under pressure as the market is only estimated to grow in the mid-single digits per year. This means, a big success initially will results in devastating pressure.
Although successful, this will end in a fight for survival. You better don’t want to be in this game.
Besides, I cannot imagine that such small companies will be able to effectively move the needle. It seems rather that the fate of the helium market depends more on what Qatar will be doing. They are handling way higher masses and already have functioning production facilities.
I think, I will watch this sector from time to time. But it would be way to early to pick a promising investment!
Conclusion
Helium is a precious and unique gas that is facing shrinking supply and higher demand at the same time.
What sounds like a no-brainer, is not so simple to handle from an investment perspective.
While many exploration companies are being pitched, I remain cautious. For me, Qatar with its already established LNG infrastructure will be the key player, not small North American exploration companies with insecure futures.
At least for now.
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